China and Japan's island spat is much more than a battle over a bunch of uninhabited rocks. And it won't be ending anytime soon.

By Michael AuslinMichael Auslin is the author of The End of the Asian Century: War, Stagnation, and the Risks to the World’s Most Dynamic Region.

October 4, 2012

The roiling dispute over a remote set of rocks in the East China Sea, known to the Japanese as the Senkaku Islands and to the Chinese as the Diaoyus, is more than a mere diplomatic spat between two of the world’s largest economies. It has stripped away the thin veneer of cooperation between the two Asian giants that most observers assumed would ripen as the two countries became increasingly economically intertwined. It also serves as yet another reminder of just how potent territorial disputes remain in Asia and how little trust there is between countries where the wounds of previous conflicts are still fresh. Although the probability of actual conflict between China and Japan over the Senkakus is negligible, the current crisis is the herald of a new cold war that will persist for years, if not decades. The result will be an Asia that remains fragmented, unable to overcome the baggage of the past, and one in which the specter of accidental conflict is ever present.

This is not how Asia’s most important tandem was supposed to turn out. Perhaps even without the conscious understanding of both countries’ leaders, the two became ever more economically interdependent once China embarked on its market liberalization and reform period in the late 1970s. Japanese investment in China reached $6.5 billion in 2005, despite poor diplomatic relations, leading a senior official of the Japan External Trade Organization to claim that Japan and China’s economic relationship is sufficiently compelling and mature to overcome occasional political flare-ups.

Such optimism is the same that propelled English politician and journalistNorman Angell to claim in 1909 that economic integration among the European countries was such as to make war between them impossible. Angell was proved tragically wrong just five years later, and the Japanese trade official’s confidence from 2005 must similarly be seen in a more sober light in the recent wake of massive anti-Japanese protests thatgrew so violent that the Chinese government had to shut them down. The danger, clearly, is that politics will trump economics in the new Asian cold war.

The reverberations from the latest clash over the Senkakus continue to widen. Ever since Japanese Prime Minister Yoshihiko Noda’s government announcedin September that it was buying three of the five islands from their private Japanese owner, anti-Japanese protests have rocked China. The danger was great enough to force Honda and Toyota to suspend manufacturing operations inside China, and the Aeon department store chain closed its stores. (The three companies have since resumed operations.) All Nippon Airways announced in late September that 40,000 seats on China-Japan flights have been canceled, despite the upcoming Chinese holiday that usually draws thousands of tourists to Japan.

As the economic fallout became clearer and as Chinese commentators called openly for war with Japan, Noda doubled down on his rhetoric, publicly refusing to entertain the idea of compromise after Yang Jiechi, China’s foreign minister, claimedthe islands were "sacred territory." The war of words seemed for a while likely to become an actual shooting war, as up to 70 maritime patrol vessels and coast guard ships from both counties tensely confronted each other in the waters off the Senkakus.

How much worse will the crisis get, and what can be done to defuse tensions? There are tentative signs that leaders are trying to cool things down. On Oct. 1, Noda reshuffled his cabinet, giving a post to former Foreign Minister Makiko Tanaka, who has close ties with Beijing. The Chinese leadership, for its part, appears to be forestalling further public protests.

Yet even as each side continues to harden its rhetoric, Noda made a departure last week from the normal pattern of contentious dispute with China. The prime minister bluntly warnedBeijing that it had more to lose than Japan from a continued conflict or war, and he prophesied that foreign investors would be scared away from a China that is seen as a bullying threat to its neighbors. The statement came on the heels of nine out of 10 months of decline in foreign direct investment in China, darkening an already dim economic picture.

Noda’s threat might provide leaders in Beijing with an excuse to try to climb down from the position they’ve taken on the Senkakus. With the leadership transition scheduled for November already upended by the expulsion of Chongqing Communist Party boss Bo Xilai from the Chinese Communist Party and the mysterious disappearance of heir apparent Xi Jinping in early September, further uncertainty and instability is the last thing the leadership needs. Using Japan as a bogeyman to stoke nationalism and let off domestic steam is a time-honored tactic in China, yet the current crisis shows how it can cause a chain reaction that could prove uncontrollable.

So far, no lives have been lost in the waters off the Senkakus or on the streets of Beijing. Yet one casualty, or one miscalculation, and the crisis could indeed become far more serious, plunging the world’s second- and third-largest economies into actual conflict. This would harm both economies, destabilize world markets, and force the United States into excruciatingly difficult choices over whether to uphold its mutual defense treaty with Japan and put at risk its entire relationship with China. Yet even absent intervention by the United States, China’s numerous maritime disputes with neighbors make it harder to claim that it is the aggrieved party.

Thus, while it seems evident to all outside observers that a shooting war over uninhabited, if strategically placed, islets is not in China’s best interests, it may have taken the events of the past few weeks to make this clear to China’s beleaguered leadership. Fresh from months of territorial disputes in the South China Sea, Beijing could outmaneuver Tokyo by making a grand gesture for stability in Asia and announce it will accept the status quo and no longer protest Japan’s administrative control over the islands. Whether that is a pipe dream or not depends on two factors unknowable to those outside the power corridors of Zhongnanhai: how calculating China’s leaders actually are, and whether they are ridden by the tiger of Chinese nationalism or ride it themselves.

Whatever course China’s leadership chooses, it will continue to believe itself to be wronged and that Japan precipitated this crisis by unilaterally trying to change the islands’ status. Japan asserts that its 40 years of administrative control simply reflect its rightful ownership of the islands dating back a century. Shots may be avoided, but the cold war between Beijing and Tokyo is real and on display for all to see. However the current crisis gets resolved, it seems a safe bet that relations will only grow chillier with time.